CIO Insights: An update on India – Why the short-term dip could be a long-term opportunity

10 minute read

While global markets remain fixated on US tariffs and AI developments, one major story has been unfolding under the radar – Indian equities have entered a bear market, down 16% from their recent peak in USD terms.

But does this dip present a buying opportunity? We think so. Despite near-term headwinds, India’s long-term structural growth story remains intact, and recent policy shifts could provide catalysts for a rebound. In this month’s CIO Insights, we revisit our thesis on India’s economy and equity market, assessing what’s driving the correction – and why we believe it could be an opportunity, rather than a structural shift.

Key takeaways

• Despite a cyclical slowdown, India’s structural story still stands. The correction in India’s equity market over the past few months has been driven by: 1) a cyclical slowdown in the economy and weak corporate earnings amid high interest rates, 2) broad emerging market weakness, and 3) foreign investors taking profits to rotate into China. But after reviewing the structural drivers behind India's growth story, we conclude that these remain intact.
• We expect recent domestic policy developments to improve growth prospects for India’s economy and markets in 2025. The country’s latest budget included large tax cuts and greater capital expenditure – both positives for growth – and its central bank has finally kicked off its easing cycle. In addition to supporting the economy, these developments could be positive catalysts for equities. The financials, industrials and consumer sectors – which are key beneficiaries – comprise about half of the country’s equity market.
• External factors are a risk, but India may be more insulated than other major global economies. A strong US dollar has pressured the rupee and weighed on USD-denominated returns for Indian equities – but this is more of a global trend, rather than an India-specific issue. More importantly, compared to other markets, India’s domestic-driven economy and strategic geopolitical position could help insulate it from US trade policy volatility. If growth-supportive policies continue to drive economic momentum, that could also offset currency headwinds and support equities.
• Our analysis shows that the recent sell-off presents an opportunity for long-term investors. With expected earnings growth of about 10% for the year ahead, that’s still one of the highest outside of the S&P 500 and Nasdaq. Valuations are also less frothy: the market’s price-to-earnings (P/E) ratio is back in line with its own post-pandemic average. Put together, our Economic Regime Asset Allocation (ERAA®) framework maintains an overweight on India.

India is facing a cyclical slowdown, but its structural story still stands

India’s economy has been facing a cyclical slowdown, with GDP growth slipping to 5.4% year-on-year in Q3 2024 – below the economy’s growth potential of 6.5–7% – due to a number of factors. For one, high interest rates have been weighing on consumer spending and business investment. The government’s capital expenditure (capex) plans also slowed last year due to the national election in June and disruptions related to a heavy monsoon season.

Slowing growth has contributed to a dip in the country’s equity markets amid weaker corporate earnings and dampened sentiment – particularly among foreign investors, with net foreign equity outflows totaling $20 billion over the past 4 months. Other global factors have also been at play, including a stronger dollar and a stimulus package from Beijing attracting inflows into Chinese assets. (For more on that see CIO Insights: Has the tide turned for China’s economy?) All said, as shown in Chart 1a, Indian equities have declined 16% in USD terms from end-September – more than other major global markets.

But despite these near-term headwinds, we believe longer-term tailwinds for the economy still stand. In particular, the structural drivers behind India's growth story remain intact:

• Demographics: India’s workforce remains large, young, and expanding. Rising productivity and incomes are fueling a growing middle class, with 100 million middle-class and middle-rich households expected to drive $2.7 trillion in incremental consumption by 2030 (1).

• Investment: Capital investment, particularly in infrastructure and growth-focused sectors, remains a key government priority. Factoring in the government’s latest budget, capex has grown at a rapid clip in recent years (more on that in a bit).

• Macro stability: While historically prone to high inflation, India’s inflation-targeting framework has helped the Reserve Bank of India (RBI) keep price pressures under control. More stable inflation not only supports economic growth but also enhances foreign investor confidence by mitigating currency depreciation risks.

(For more on India’s structural growth story, read CIO Insights: Here’s why you should consider investing in India.)

Indeed, these forces have driven the longer-term bull run in the market. As illustrated in chart 1b, Indian equities have kept pace with the US and outperformed most other major global markets over the past 5 years – with the market up 11.3% per annum in USD terms, versus 14.8% for the S&P 500. Performance has been similarly robust over an even longer period, with the Indian market’s annualised growth of 10% over the past 20 years broadly in line with that of the US market.

Recent domestic policy developments could be catalysts for Indian equities

The question now is: what’s next? Given the policy-related reasons behind India’s recent slowdown, more recent fiscal, monetary, and political developments could provide catalysts for its economy and markets in the months ahead.

The country’s latest budget is positive for consumption, public spending

India’s parliament recently unveiled its budget for the coming fiscal year ending March 2026. One of our biggest takeaways from the budget announcement was a proposal to slash personal income taxes – which is expected to give low and middle-income workers an extra 1 trillion rupees (US$12 billion) to spend.

This is significant for a consumption-led economy like India, where household spending accounts for 58% of GDP. All else equal, we estimate that that alone could lift GDP by 0.3 percentage points – or even more if you take into account potential multiplier effects (i.e., if businesses respond by hiring more workers or raising wages).

The budget also showed plans for a substantial 17.4% year-on-year increase in government capital expenditure to 15.5 trillion rupees (US$177 billion) – which goes to investments in infrastructure like roads and railways, or to developing sectors like defence, manufacturing, or urban development. That outsized gain is partly due to a lower base of comparison, stemming from last year’s elections and monsoons.

Even so, the pickup in investment over the past 5 years has been sizable, at a compounded annual growth rate of 18.6%. That’s shown in Chart 2, which also highlights how government capex as a share of GDP has been steadily rising in recent years – illustrating the focus placed on it as a key driver for the country’s longer-term growth prospects.

(For more on how we expect fiscal policy to shape the global macro and market environment, see our 2025 Macro Outlook: “FAT” is the new normal.)

The RBI finally kicked off its rate cut cycle – a positive for growth

On the heels of the budget announcement, the country’s central bank, the RBI, kicked off its easing cycle on 7 February – reducing the burden from high rates on households and businesses after 2 years of keeping interest rates on hold. As Chart 3 illustrates, real interest rates had been positive for most of that period.

Typically, positive real rates dampen economic activity by making capital investment more expensive. The effect is more pronounced on interest-rate sensitive sectors like construction, real estate, and capital-intensive industries like manufacturing.

Looking ahead, cooling inflation and pressures on the economy should allow for continued rate cuts from the RBI. The market consensus is for another 50 basis points (bps) of rate cuts in the coming year.

What does the above mean for Indian equities? The combination of fiscal and monetary easing is a positive for the country’s equity market, in our view. As illustrated in Chart 4, the most direct beneficiaries of interest rate cuts, tax reductions, and higher capex – namely, financials, industrials, materials, and consumer sectors – comprise nearly two-thirds of the Nifty 50 Index.

A more unified government could be supportive of economic policy

On the political front, Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) has regained momentum in key states after its unexpected loss in last year’s national election. (For more, see CIO Update: A closer look at India's post-election market volatility.) Notably, the BJP-led alliance secured a victory in Maharashtra – India’s wealthiest state – in November, and won Delhi’s recent elections earlier this month. 

These wins matter because India’s decentralised governance model gives states significant influence over policy implementation. That includes measures from the latest budget, but also impacts the government’s ability to put into place longer-term economic reforms aimed at improving the ease of doing business.

Global forces pose challenges, but India may be more insulated than other economies

That said, risks remain – particularly as a result of global challenges. For one, the combination of US tariff threats, higher-for-longer US interest rates and a resilient US economy has strengthened the dollar, putting pressure on the rupee and, in turn, USD-denominated returns for Indian equities. 

However, as shown in Chart 5, the impact of the dollar’s strength is a global phenomenon, affecting currencies and markets worldwide. If India’s growth-supportive policies continue to drive economic momentum and investor sentiment, they could help offset these currency headwinds and support equity market returns.

In addition, we believe India could remain more insulated from US trade policy volatility compared with other economies, for a few reasons:

• The economy is more domestically-driven, with consumption and investment playing a more dominant role in growth. Its total exports to the US account for just 2–3% of GDP.
• There is still a high degree of uncertainty over the magnitude and implementation of any US tariffs. Here, India’s policymakers appear to have taken a pre-emptive approach. In its latest budget, the government lowered import tariffs on a range of goods – including autos, motorcycles, chemicals, and critical minerals (2). 
• India’s role as a counterweight to China – as well as its potential as a supply-chain alternative – could enhance its geopolitical standing and economic prospects. In fact, Modi was one of the first foreign leaders to visit US President Donald Trump since his inauguration, highlighting the strategic importance of the relationship. This should keep the door open to trade negotiations between the two countries.

Indian equities are still attractive from a global perspective

Given the factors outlined above, we believe India’s equity market remains compelling from a global perspective, supported by strong longer-term growth prospects and near-term policy catalysts.

First, let’s look at earnings. Currently, 12-month forward earnings growth for Indian equities is projected at around 10% – one of the highest globally outside of the S&P 500 and Nasdaq, which have been driven by surging tech stocks. Notably, when excluding the Magnificent Seven, US earnings growth is expected to be closer to 7%. This strength in Indian equities is underpinned by a solid economic growth outlook, which, while it’s moderated in the near term, still outpaces most major economies.

From a valuation perspective, as shown in Chart 6, India’s P/E ratio is now back to 21x following the recent correction. That’s higher than other major global markets, but is now back within its post-pandemic average. This reversion suggests that valuations are more aligned with forward earnings expectations, potentially presenting a buying opportunity.

Despite the near-term dip, India’s equities still have long-term potential

As long-term investors, we encourage you to stay focused on what drives real returns – economic trends, company earnings, and asset valuations – rather than short-term market fluctuations.

In the case of India, its strong fundamentals, near-term policy catalysts, and long-term structural growth drivers reinforce its appeal. The recent correction has brought valuations to more reasonable levels, presenting an attractive entry point. Additionally, India is somewhat more insulated from the trade policy uncertainty that is roiling global markets.

Put together, as a long-term global investor, the case for India remains compelling. That’s why our Economic Regime Asset Allocation (ERAA®) framework has kept an overweight position to the country’s equities in our General Investing portfolios powered by StashAway. If you’re looking to gain additional exposure to the market, our Flexible Portfolios offer access to over 70 ETFs spanning multiple asset classes, including Indian equities.

As always, we’re here to help you cut through the noise – and will continue to guide you with data-driven perspectives so you can invest with confidence.

Glossary

GDP (gross domestic product)

The total monetary value of all finished goods and services produced within a country's borders in a specific period of time, such as monthly or quarterly.

Capital expenditure (capex)

Money spent by organisations or governments to acquire, maintain, or upgrade physical assets such as infrastructure, buildings, or equipment.

Real interest rate

Interest rates adjusted for inflation – this represents the actual cost of borrowing and lending. For example, if a bond pays 5% interest but inflation is 3%, the real interest rate is 2%.

Fiscal policy

Tools used by governments to influence the economy through spending and taxation. Increasing government spending or cutting taxes can be used to boost growth, for example.

Monetary policy

Tools used by central banks to manage the economy by controlling the money supply. The main one being interest rates – raising them makes borrowing more expensive to fight inflation, while lowering them encourages borrowing to stimulate growth.

References

1. Shukla, R. (2023). The rise of India's middle class: A force to reckon with. People Research on India's Consumer Economy (PRICE). Retrieved from: https://www.price360.in/expertview/the-rise-of-indias-middle-class-a-force-to-reckon-with
2. Biswas, S., and Inamdar, N. (2025). India looks on nervously as Trump wields tariff threat. BBC News. Retrieved from: https://www.bbc.com/news/articles/cn93eyp5r2zo